Top-rated assets shield state-run banks from subprime heat

Top-rated assets shield state-run banks from subprime heat
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First Published: Wed, Mar 05 2008. 10 56 PM IST
Updated: Wed, Mar 05 2008. 10 56 PM IST
Mumbai: Public sector banks are less likely than their private sector peers to suffer huge losses from their exposure to credit derivatives as they have kept away from buying risky credit instruments, opting instead for safer papers with lesser returns, according to executives of leading state-owned banks.
Bank of India, Bank of Baroda and a couple of other public banks said they do not have to provide high mark-to-market losses as ICICI Bank Ltd did, as their underlying assets are almost all from top-rated Indian clients and the banks have chosen “minimum risk, less-return” derivatives. However, the public sector bank with the largest exposure to these bonds and loans, State Bank of India (SBI), could not be reached for comment.
“PSU (public sector undertaking) banks always play safe with public money and are not high risk takers as private banks. Generally, we go for the safest derivatives and take care that the risks are properly mitigated and the investments hedged,” said a senior public-sector banker, who did not wish to be identified.
Bank of India, with a credit derivatives portfolio of $400 million (Rs1,612 crore), had till the December quarter provided for only $1 million as mark-to-market losses. “We might provide another $1 million in the fourth quarter as mark-to-market losses for these securities. These are all highly rated Indian assets; no question of default here,” said a Bank of India executive, who did not wish to be named.
Bank of Baroda, which has a portfolio of about $300 million in credit-linked savings notes, has provided for about Rs11 crore till December. “Even if we go for another round of provisioning, it won’t be more than Rs4-5 crore,” said Satish Gupta, executive director of the bank.
Among state-owned banks, the country’s largest lender SBI has a credit derivative exposure of about $1 billion.
In contrast, the country’s biggest private-sector lender, ICICI Bank, has an exposure of about $2.2 billion to risky credit instruments, including that of its foreign subsidiaries. The lender plans to provide about $160 million in mark-to-market losses related to credit derivatives.
Credit derivatives generally have three tranches—high risk with high return, medium risk with medium return and low risk with low returns. The low risk tranches can be considered as “no risk” as the holders of these tranches are paid as soon as a credit derivative instrument defaults.
However, analysts believe investors will not differentiate between private and public sector bank stocks in the wake of ICICI Bank booking significant mark-to-market losses. “There is fear of other banks facing similar losses,” said Rau Thakkar, head of equity research at Mumbai-based NVS Brokerage Pvt. Ltd. “In the short term, panic selling could continue.”
Banks account for 15% of the total market capitalization in Indian equity markets. The 41 publicly-traded banks on the Bombay Stock Exchange (BSE) have cumulative market capitalization of $150 billion, of which state-owned banks account for 50%.
Fund managers, however, are holding on to their bank stocks. Satish Ramanathan, head of equities at Sundaram BNP Paribas Asset Management Co. Ltd, said his firm has not cut exposure to bank stocks, including the state-owned ones.
Bank stocks have been under pressure since Friday, after finance minister P. Chidam-baram announced a Rs60,000 crore loan waiver to small and marginal farmers. This was compounded by ICICI Bank’s mark-to-market provision of $264.34 million related to credit derivatives.
ICICI Bank’s stock has dipped 12% in the past three sessions, while SBI lost more than 12%. And the Bank of India stock is down more than 20% in just three days.
The bank index, or Bankex, has lost almost 12% in the past three trading sessions, while Sensex, BSE’s benchmark index, lost about 6%.
anup.r@livemint.com
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First Published: Wed, Mar 05 2008. 10 56 PM IST